Chancellor takes interest in £35bn cash pile at Bank of England - but Labour accuses him of using 'smoke and mirrors' to improve appearance of public finances

Chancellor George Osborne has been accused by Labour of using ‘smoke and mirrors’ to improve the appearance of the public finances after the Government grabbed £35billion of accumulated interest from a Bank of England account.

The Treasury intends to use the money to help pay down the Government’s budget deficit and debt. But the money transfer from the Bank of England will be too small to close the black hole in the public finances.

The cash pile of £35billion – enough to pay for one year’s defence budget – is the interest earned by the Bank of England on its holdings of £375billion of government gilt edged stock that it holds as a result of quantitative easing (QE) – printing of money.

Osborne's bonus: The government has grabbed £35billion of accumulated interest from a BoE account

If the Bank engages in further QE
next year, as widely expected, the Treasury could expect to get further
cash flows from the interest earned.The injection into the Exchequer could
not come at a better time for the Chancellor as he prepares his Autumn
Statement on December 5.

Under the Chancellor’s plans some
£11billion of the money swept up will be used to reduce this year’s
deficit – forecast as £121billion in March. It is expected the
remaining £25billion will be used to reduce the national debt over the
next two years starting in 2013.

More...

Shadow chief secretary to the
Treasury, Rachel Reeves, attacked the deal as outlined in an exchange
of letters between Osborne and Bank of England governor Sir Mervyn King:
‘George Osborne desperately needs to find a way out from his failing
economic plan. This smoke and mirrors will fool nobody.’

Osborne is in danger of breaking his
own fiscal promise that by the end of this Parliament the levels of
government debt, the accumulation of years of overspending and
borrowing, will be falling from a peak of 96.6pc of the economy’s total
output.

Despite the cash injection from the
Bank, sources at the Treasury indicated there would have to be further
measures if Osborne is to meet the fiscal rule with a further cuts in
welfare spending, of £10billion or more, thought to be in the mix.

The Treasury claims the decision to
remove the cash surpluses from the Bank is in line with what Japan and
the US have been doing.

Simon Ward chief economist at fund
managers Henderson Global Investors said: ‘There is a strong case for
the Treasury booking the Bank’s net income from QE rather than allowing
it to accumulate off balance sheet.’